Observations – in and out of season – on History, Economic History, and Sustainability

Getting It Right But Still Not Getting It On Trade

Large among the benefits of my ForeignAffairs subscription are the “Subscriber Exclusives” – downloadable virtual issues that show FA has been attending for years to today’s hot button topics. A “Who Benefits from Trade?” compendium was made available last September. From oldest to newest the contributions range from G.B. Roorbach’s “Foreign Trade or Isolation”, from 1932 (when the issue was perhaps causing some inconvenience for Herbert Hoover), to Douglas Irwin’s current-year “The Truth about Trade: What Critics Get Wrong About the Global Economy.”

Reading Irwin’s encomium to free trade in the wake of the recent electoral debacle is not exactly fun. That he gets a lot of the facts right is not much comfort, now that we know that facts don’t matter.

That being the case, it shouldn’t matter to me that Irwin doesn’t get it all right. Yet it does matter to me, perhaps because the ways in which he gets things wrong may align somewhat with the eyes-wide-shut manner by which technocrats (myself certainly included) misjudged the depth and breadth of the populist revolt.

I have no argument with the broad themes or conclusions of Irwin’s argument: that trade is critical to American growth, that trade agreements are a critical form of US foreign engagement – I could not agree more. That NAFTA was a net benefit to Americans (and not just North Americans) I have no doubt. Let the mob hang me (along with Irwin, of course) for all heresies against making America great.

Where I join the accusers is around the details. Consider the following passage:

“While the gains from trade can seem abstract, the costs of trade restrictions are concrete. For example, the United States has some 135,000 workers employed in the apparel industry, but there are more than 45 million Americans who live below the poverty line, stretching every dollar they have. Can one really justify increasing the price of clothing for 45 million low-income Americans (and everyone else as well) in an effort to save the jobs of just some of the 135,000 low-wage workers in the apparel industry?”

To anyone with a Benthamite bone in their body, the logic of sacrificing “135,000 low-wage workers in the apparel industry” for the benefit “45 million low-income Americans” might at first seem unassailable. And so it would be – if we faced this decision only once. But we don’t; we face it, in theory, for every sector and industry of the American economy, with each sector presenting a new cohort of sacrificial lambs, while the cohort of “low-income Americans” remains exactly the same. That mounts up on the low-wage worker” side. Of course, any sector, taken in isolation, is a special interest group. Across sectors, there are more than enough “low-wage workers” to give pause to Irwin’s glib calculus.

In another bad-asymmetry example, Irwin acknowledges the findings of the “China Shock” economists, Autor, Dorn, and Hanson, that estimate 972,000 jobs lost to Chinese imports between 2000 and 2007, yet manages to miss not their point, but the point:

“The number of jobs lost is large, but it should be put in perspective: while Chinese imports may have cost nearly one million manufacturing jobs over almost a decade, the normal churn of U.S. labor markets results in roughly 1.7 million layoffs every month.”

The problem here is that the monthly churn of the US labor market, of whatever size, does not diminish the importance of an independent negative trend. The trend may have stopped – but it was stopped by a cataclysmic event, the financial crisis of 2008. We have here not only the counterfactual that, absent crisis, the trend may have continued, but also the simple, down-the-middle, ball-and-strike call that negative trends leading into a crisis are of no small interest.

Even Irwin’s positive recommendations, such as expansion of the Earned Income Tax Credit, shares the overall not-getting-it tone around jobs. The EITC cannot help the unemployed. It benefits people who have – and can keep – the very “low-wage” that Irwin is otherwise willing to sacrifice.

The bottom line is that jobs matter. Even low-wage, “bad” jobs matter, especially to the people who have them and who can’t hope for much more. And concrete jobs matter far more to voters than the abstract (and unequally shared) “net-welfare gains” extolled by economists. Beyond this, structural changes in the economy are not just things that come from nowhere, which is to say, they not solely attributable to endogenous factors like “technology”. They are also attributable to exogenous, top-down policy decision – and voters seem to get that fact very well.

Irwin laments that “Free trade has always been a hard sell.” And being a trade economist, or a tradeoff economist as the joke goes, isn’t an easy job. But over the last 25 years, trade policies and trade outcomes seem to have contributed to deepening economic divisions in the United States. The demands by voters to take another look may not be completely misplaced.